FDI in multi-brand retail: Is India ready for it now?

India’s retail sector has undergone a rapid transformation over the past decade and this process is expected to strengthen in coming years with the rise in population, per capita income and urbanisation.

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FDI in multi-brand retail: Is India ready for it now?

India’s retail sector has undergone a rapid transformation over the past decade and this process is expected to strengthen in coming years with the rise in population, per capita income and urbanisation.

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By Jones Lang LaSalle

India’s retail sector has undergone a rapid transformation over the past decade and this process is expected to strengthen in coming years with the rise in population, per capita income and urbanisation. According to the provisional estimate by the Census of India 2011, the country’s total population has reached nearly 1.21 billion compared to the 1.03 billion recorded in the previous census of 2001. This tremendous growth in population has led to an unprecedented scale of urbanisation, with the share of urban population increasing to 31.0% in 2011 from 28.0% in 2001.

According to the United Nations, India has the highest rate of change in its urban population of all the BRIC nations and this figure is likely to remain above 2.0% annually for the next three decades. Nearly 64% of the Indian population is in the working age group of 15-64 and 35.0% is relatively young, aged 15-34. As per IMF estimates, the per capita GDP of the country was INR 46,221 per annum at end- 2011, a figure that is forecast to rise to INR 58,224 by end 2015.

With India’s growing per capita income and a rising middle class, the retail sector has the potential to be the real growth engine of the country’s economy. While demand for a superior shopping experience is evident in the metropolitan cities, the Tier II and Tier III towns are also rapidly acclimatising to the changing landscape of the Indian retail market. Growing consumerism, changes in consumers’ tastes and preferences, and heightened brand consciousness has been fast replacing traditional mom and pop stores with organised retail malls that house lifestyle and luxury brands from national and international retailers.

As part of its retail transformation, India has seen substantial increase in mall space in recent years. Over the past decade, such cities as NCR-Delhi, Mumbai and Bangalore have shown prominent growth in retail stock, while Hyderabad, Pune, Chennai, Kolkata and many other Tier III towns are rapidly emerging as the retail growth corridors of the next decade.

FDI in multi-brand retail: Key to speed up retail transformation

In an important policy move, the Indian government gave permission for up to 51% FDI in multi-brand retail in September 2012. The objective of this policy is to boost the retail business through adoption of international standards and practices. The entry of international products, practices and technology is expected to enhance the efficiency of domestic retailers. The government has made it mandatory for foreign multi-brand retailers to place at least 50% of their total investment in back-end infrastructure, thus giving a boost to facilities such as logistics and warehousing.

With multi-brand retailers exploring opportunities in India, demand for retail space is likely to rise significantly. This will induce developers to launch new malls and, as store size requirements are significantly higher for multinational retailers, will encourage them to build larger malls along with sufficient mall infrastructure. Quality will also receive a significant boost as the malls will be constructed to meet international standards and norms. The competitive environment is likely to enhance the productivity and efficiency of domestic retailers; with better and more transparent pricing, sales will improve significantly. Domestic retailers will also leverage their portfolios by adopting many of the new retail strategies followed by large international retailers.

The average size of shopping malls in India has already begun to increase as developers focus on larger spaces. The success of a mall does depend on its size as superior grade malls are nearly double the size of average grade malls. It is estimated that the average size of a superior grade mall is 400,000 sq ft, whereas the normal size of average grade and poor grade malls are 190,000 sq ft and 150,000 sq ft, respectively. The larger malls allow for a complete tenant mix in various formats and categories, and can adopt modern mall management practices easily. With the introduction of FDI in multi-brand retail, the average size of a mall is likely to increase as foreign retailers tend to occupy large spaces. As a consequence, both total mall supply and size are expected to increase over the medium to long term.

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